SECP seeks CVT relief for REIT scheme deals

[Naveed Yaseen]

ISLAMABAD (June 06 2009): The Securities and Exchange Commission of Pakistan (SECP) has sought exemption of capital value tax (CVT), in coming budget for 2009-10, on purchase of immoveable property for real estate business under the Real Estate Investment Trust (REIT) scheme.

The Commission has further asked the FBR to extend exemption from year 2010 to 2015 on profits and gains accruing to a person on sale of immovable property to a REIT Scheme through amendment in Second Schedule of Income Tax Ordinance 2001. The proposed amendment in Second Schedule says: "Profits and gains accruing to a person on sale of immovable property to a REIT Scheme up to June 30, 2015."

Sources told Business Recorder on Friday that the FBR is examining this budget proposal of the SECP for incorporation in Finance Bill 2009-2010 to promote REIT business in the country. According to the proposal, the REIT shall be exempt from CVT on purchase of real estate on its own name for the purpose of launching REIT Scheme.

The SECP is trying to promote the formation of REIT Schemes so that real estate transactions are routed through a documented position where taxes cannot be avoided. Additionally, the Commission expects enhanced revenues for the government in future by way of different taxes. The REIT schemes are not getting popular due to high transaction cost. CVT exemption will provide necessary impetus to kick-start the REIT business in the country.

The following example will help to comprehend the costs associated with transaction of real estate: If an REIT scheme purchases a property in Lahore Cantt, then costs of transaction (excluding agent commission) will be as follows: Stamp duty 4 percent on declared acquisition cost; court fee one percent on declared acquisition cost; Cantt Board Fee one percent on declared acquisition cost and CVT 2 percent on declared acquisition cost.

Therefore, total transaction cost would come to around 8 percent of declared real estate purchase price. Taking into account these factors, transaction cost to purchase Rs 5000 million real estate, will be Rs 400 million. It has been strongly proposed that the exemption of CVT is required to encourage investment in this regulated real estate sector. For this purpose, amendment in Finance Act 1989 Section 7 is needed for exemption of CVT on REIT.

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